States urged to disregard outsourcing deals that don’t slash costs

As the popularity of outsourcing and offshoring continues to rise, state and federal legislators continue attempts to curb the economic impacts through legislation. A new provision in the final version of the 2006 Transportation, Treasury, the Judiciary, and Housing and Urban Development appropriations bill would limit agencies’ ability to hire private-sector firms to take over work previously done by agency employees. Under the new provisions, contractors competing for such work must show that they can do the job at a savings of at least 10% or $10 million, whichever is the lower amount.  (See “Anti-offshoring legislation heats up”)

This is a clear reversal of the trend for federal procurement processes to be run more like a business. It is a reaction by some lawmakers who feel the current guidelines favor contractors over federal employees and is designed to discourage outsourcing. While this change may not be the best value for taxpayers, it is a common reaction among both federal and state lawmakers to the outsourcing and offshoring trend.

Legislation addressing outsourcing has been introduced in nearly all-50 states in addition to the federal actions. Over 112 measures relating to outsourcing have been introduced in at least 40 states in the first quarter of 2005. Most of the bills have been referred to committees. Some are stalled, some have been killed and a handful have been passed. State level legislation has taken one of three forms:

* State Contracting Rules – This is the most common approach taken by the states. These bills would, in various forms, either limit the award of state contracts to U.S. companies or U.S. citizens.

* State Labor Laws – Legislation introduced for notice of layoffs when closing state facilities due to outsourcing.

* Performance Standards and Preferences – Legislation to study outsourcing, set standards and/or give preference to in-state contractors.

My home state of Colorado had, in 2004, introduced two bills that were the most restrictive offshoring legislation introduced in any state legislature. Had these bills passed, contracts would not have been awarded to companies that had reduced staff by 100 or more as a result of offshore outsourcing. A much milder bill was introduced and passed earlier this year. A summary of state legislative activity concerning outsourcing can be found at the National Conference of State Legislators site and in a PDF of “New State Laws Passed on Offsource Outsourcing in 2005”.

All of this legislation is focused on government work being outsourced and does not address outsourcing by the private sector. The focus of state level legislation has been primarily to limit offshore outsourcing while remaining relatively neutral to U.S. based outsourcing. The recent federal appropriations bill seems to make no distinction between domestic or foreign outsourcing. This bill essentially favors keeping work in the hands of federal employees unless significant cost savings can be realized. If outsourcing work would save only a small amount, or remain cost neutral, then the work cannot be outsourced.

It is very interesting to see the federal appropriations bill setting policies against domestic outsourcing. The structure of that bill does not take into account the quality of the work. A slight savings or cost neutral deal blocked by this bill could very well provide a better service level or access to more current technology. Outsourcing should be measured on more dimensions than cost.